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02/14/2018

Challenger FinTech Banks - How easy is it to enter the Dutch market?

Technology is changing our world at lightning speed as we use more smart gadgets than ever before. Fintech innovations are reshaping the way to manage payments, savings or mortgages. The digital revolution is here, from artificial intelligence, blockchain to big data, all significantly influencing the technology shift in banking. These trends have led to an increased number of fintech companies. But how easy is it to enter the Dutch banking market?

Dutch banking market

In the Netherlands a new challenger bank would face a highly concentrated banking sector with a small number of large financial institutions covering wide range of financial products. The landscape didn’t change much in the last decade, in fact, it has become even less competitive since the financial crisis. The share of the five largest credit institutions in the Netherlands accounts for 85% stake of the market, one of the highest in the EU - while EU average is only 46%. (Figure 1) Due to their size, any of them going bankrupt would cause significant damage to the real economy, thus these institutions will need to be rescued by the government. This sort of “government guarantee shield” ensures a safety net for these banks, advantageous rates to borrow and of course less stress to compete. On the other hand, it puts smaller banks into a disadvantageous position when it comes to funding.

Another evidence of a concentrated banking market is depicted in Figure 2. Rabobank, ING and ABN AMRO control 60% to 80% of the mortgages, business loans and savings market segments. Dutch banking market was less homogenous 50 years ago5, divided into clear segments. Banks were focusing on savings, mortgages or commercial banking, leading to a different business model: savings banks invested in safe assets and mortgage banks were funding their activities from the capital markets or from issuing bonds. Universal banks were formed during the `80s `90s bank mergers in the Netherlands.5 Since the financial crisis, these systematic large banks were concentrating more on their core activities and partially withdrew from foreign markets at the same time. However, it didn’t result in a more diverse banking sector. Moreover, the dominance of domestic banks on the Dutch market is one of the highest in Europe. It is very challenging for newcomers to set foot in such a highly concentrated market, especially where the mortgage loan to value ratio is very high. The fusion of these characteristics makes the Netherlands a difficult market for foreign and challenger banks as well.5

Applying for a banking licence

If a fintech company wants to enter the banking market it should submit a licence application either in The Netherlands or via European passport in another EU country. According to the European Central Bank (ECB), six fintech companies have completed the licencing process since July 2016.The generic licence assessment criteria are applicable to all banks. In addition, the ECB addressed the supervisory challenge of the assessment of fintech bank licence applications in a draft guideline. The ECB concluded to tighten fintech bank related requirements working closely together with the national competent authorities (NCAs).

Fintech Banks have “a business model in which the production and delivery of banking products and services are based on technology-enabled innovation”.1

The ECB`s main goal is to ensure the safety and stability of the European banking system, hence it wants to maintain prudential standards for the “newcomers”, too. The ECB will have the competent authority to assess whether fintech banks are in the possession of the relevant technology, banking expertise. The fintech banking licence assessment guide identifies four focus areas to achieve its objective. (Table 1)

Yet, fintechs might feel (over)regulated however the new draft licensing guideline is creating a clear transparent overview. Regulation is more than necessary when we realize the importance of a stable bank system for the European Union`s economy and society.

Nevertheless, regulators are doing their best to provide opportunities for new entrants like fintech banks.

In certain cases, regulations can support challenger banks and deposit guarantee scheme is one of them. The regulators’ main aspect is to increase depositors’ confidence and maintain financial stability at the same time. Customers can keep up to 100,000 euros deposit in any financial institution (covered by the scheme) with taking no risk of loss in case of bankruptcy. This can encourage customers switching to new fintech banks with the same confidence level but perhaps with more advantageous rates and/or services.

Another European policy which gives huge flexibility for challengers (notwithstanding for well-established banks too) is the European banking passport. The NCA granted licence corresponds to the European banking passport, it allows financial institutions to have full access to the market for financial services in all member states. This serves as a significant advantage for payment companies across the continent. In line with the new Payment Services Directive II (PSD2), passporting will be extended for new types of payment services such as payment initiation services (PIS) and account information services (AIS). 4

Moreover, the PSD2 in itself is also a regulation aiming for more competition in the EU banking market. The EU PSD2rule had come into force beginning of this year, but it has not been implemented in national regulation in all EU countries, e.g. The Netherlands. From this year bank customers are expected to have greater control over their financial data and will be eligible to authorize access to third parties. Even though some discrepancies with GDPR (General Data Protection Act) are still not re-solved, PSD2 will in the end reshape the retail banking market. PSD2 will have a significant impact on what is now been called “open banking”. The term open banking stands for the open APIs (application program interface) which enables third parties to develop financial services and products by accessing customer`s bank data. The lawmakers’ intention is to benefit the end user, however, open banking initiative also encourages innovative technology lead companies to offer financial products and services.

Online depositors can exhibit price sensitive behaviors, being more likely to withdraw their deposits and switch to a competitor paying higher interest rates,”1

Traditional banks are facing the challenge to cope with the new way of banking: disloyal customers, highly competitive products and lower costs. None of these factors are in favor of the traditional bank`s profitability. On the other hand, if traditional banks can move fast enough and adjust their offerings, they could leverage on their existing market positions and their consumers` high level of trust. They can exploit their focus to open legacy systems to APIs. Some Dutch banks have already moved to that direction by developing products such as personal finance (e.g. ABN AMRO Grip) or investment application (e.g. Peaks).

These sort of market developments in banking offer big opportunities for fintech challengers. Both the healthy economy and low interest rates ensure excellent funding options. Additional stimulus is given by the booming financial technology. A branchless fully online banking platform with possibly better savings and mortgage rates can be a real alternative for a well-defined audience. Furthermore, challengers could leverage faster and more flexible on the opportunities are given by open banking.

References:

[1] ECB (2017) Guide to assessments of fintech credit institution licence applications , https://www.bankingsupervision.europa.eu/legalframework/publiccons/pdf/l...
[2] ECB (2017) Public consultation on the guide to assessments of licence applications and the guide to assessments of fintech licence application, https://www.bankingsupervision.europa.eu/legalframework/publiccons/pdf/l...
[4] European commission (2015) Payment Services Directive – Fact sheet, http://europa.eu/rapid/press-release_MEMO-15-5793_en.htm?locale=en
[5] ECB (2016): Perspective on the structure of the Dutch banking sector, https://www.dnb.nl/en/binaries/DNB-study%20Perspective%20on%20the%20stru...
[6] The Netherlands Authority for Consumers & Markets (2014): Barriers to entry into the Dutch retail banking sector
[7] Directive (EU) 2015/2366 on EU-wide payment services, http://eur-lex.europa.eu/legal-content/EN/LSU/?uri=CELEX:32015L2366
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